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High Times For A Former Milken Man

October 11, 1998

Finance: DEALMAKERS

HIGH TIMES FOR A FORMER MILKEN MAN

Gary Winnick scored big with Global Crossing's IPO

President Clinton would be there. So would Sylvester Stallone and Jeff Goldblum. But financier Gary Winnick, in search of his first billion-dollar investment, decided to skip the mid-August Democratic fund-raising bash at the home of Hollywood mogul Jeffrey Katzenberg. Instead, he headed for his own gathering of potential investors in New York, sending his 20-year-old son in his place.

The deal ended up being worth the trip. Even as Wall Street was caught up in market jitters, Winnick's $399 million initial public offering for Global Crossing Ltd. was oversold at $19 per share. That currently values the 50-year-old Winnick's 24% stake in the company, which owns and operates a digital-telecommunications cable under the Atlantic, at $1.2 billion. Global Crossing has grand plans to undercut existing carriers worldwide with phone and data offerings. "It was a home run for me," says Winnick from his Beverly Hills office.LOW PROFILE. The deal was also a coming-out party for one of Los Angeles' most private dealmakers. Since 1985, when he left Drexel Burnham Lambert after working for nearly a decade with junk-bond guru Michael Milken, the onetime furniture salesman has kept a low profile while buying and selling companies in retail, health care, reinsurance, real estate, and entertainment. Now, his deals are getting plenty of attention. In addition to Global Crossing, Winnick and his partners are expected to soon exercise their option to buy a 27% stake in Playa Vista, the long-stalled 1,087-acre Los Angeles housing and retail development where DreamWorks SKG has tentatively agreed to locate its new studio facility. After months of tense negotiations, DreamWorks and Playa Capital, the property's developer, have tentatively agreed to move forward with a 48-acre DreamWorks studio.

Most of the flurry of deals Winnick is pursuing involve Global Crossing, which plans to spend $2.8 billion to lay four separate underwater fiber-optic cables that eventually will connect the U.S. to Europe, Asia, and Latin America. Japanese phone company DDI Corp. signed up to use Global's U.S.-Japan undersea cable, and long-term deals have already been signed with Denver-based Qwest Communications International Inc. and Germany's Deutsche Telekom to use the company's U.S.-Europe line. In early October, Global is expected to announce a $700 million deal to link its undersea lines with more than a dozen major European cities.

Capitalized with more than $3.5 billion, says Winnick, Global Crossing plans to eventually provide phone and data service to the top 100 cities in the world, which account for 85% of global telecommunications traffic. It's a risky proposition, if only because AT&T and 13 other major carriers plan to lay a competing cable under the Atlantic, and another consortium is laying another under the Pacific. Still, international phone and data traffic is the fastest-growing segment of the business, and Global figures its deals with local phone operators will protect them down the road. "They've got the advantage of being the first to lay down cables," says Mark Langner, a research associate at Hambrecht & Quist. "But it is hyper-expensive, and you can't just be a wholesaler to play this game. It makes sense for these guys to build a network."

Winnick's empire-building is a far cry from Drexel, where the Long Island native started out as a bond salesman for Burnham & Co. A large, beefy man who prides himself on being a tough negotiator, Winnick was recruited in 1978 by Milken to move west with the high-yield group. He left seven years later. He was not implicated in the investigation that led to Milken's prison term. Milken was a "brilliant guy," says Winnick. "He was just a little misguided."

Winnick is a charter member of the vast network of former Drexel employees, many of whom are in prominent positions and do deals with each other. Winnick's first deals after Drexel were for a partnership that included Milken and such Milken clients as the Bass Brothers and Richard E. Rainwater. He is close to CIBC Oppenheimer Corp., which arranged the initial $200 million to begin laying the Atlantic cable in 1997.

Not all of Winnick's deals have worked out well. One of his first, the 1988 purchase of Los Angeles-based RB Furniture Inc., fizzled when the early '90s recession forced it into bankruptcy. Winnick bought the company for $48.5 million and then sold a 35% stake to a former Drexel client, First Executive Corp., in exchange for $53.5 million in junk bonds. Winnick, who served as chairman for two years before selling in 1991, says he broke even.

Most of Winnick's time these days is spent on the telecom industry. In 1994, he bought a controlling interest in OpTel Inc., which provides satellite-delivered television services to apartment buildings. He says he made $100 million on his $12 million investment when he sold it to Montreal-based Le Group Videotron last year.

Winnick recently began focusing on the use of voice and data lines worldwide, which was fast outpacing wire and satellite capacity to deliver it. A key deal was a contract in March, 1997, with AT&T Submarine Systems, one of the few worldwide companies capable of laying underwater phone lines. To get the deal, Winnick paid big bonuses to lure several of the unit's senior managers, including its top two executives.

Winnick raised $75 million in equity, including $20 million of his own, to launch the project. Among the investors was the Union Labor Life Insurance Co., backed by the AFL-CIO pension fund, which has $3.2 billion in assets. To get the bank's $7.5 million investment, says the union's senior vice-president, Michael R. Steed, Winnick promised that much of the construction would be union labor.CIRCLING THE GLOBE. A big breakthrough came from the Tisch family, which invested in the project's junk bonds and then raised its stake to $100 million by buying equity. "We like Gary," says James S. Tisch, president of the family-run Loews Corp. "Sure, he's a spielmeister like a lot of dealmakers. But he has also put together a great team, and he has a great concept."

That team is headed by Jack M. Scanlon, a former president of Motorola Inc.'s cellular unit. It also includes former Arco Chairman Lodwrick M. Cook, who was a member of a GOP fund-raising group with Winnick. As colleagues, Winnick and Cook are unusually close. And despite the disparity in their ages-Cook is 70-they are also close personal friends. Where Winnick tends to the hyper, Cook is a calming influence. Recently returned from China, Cook has been instrumental in opening up new territories.

Global Crossing's biggest coups are the deals with phone companies to use the undersea lines. The company has nearly paid for its first cable, says Winnick, by signing more than $600 million worth of 25-year contracts to provide capacity to 22 carriers, including Swisscom and GTE Corp. The company is also negotiating with such players as British Telecommunications and AT&T.

For now, Winnick intends to remain chairman of Global Crossing, pursuing a state-of-the art cable system that he says will one day circle the world. Will he sell out, especially as other phone-company heavyweights gear up to add their own new capacity? "I'm not looking to sell," he says, sitting in front of a blackboard crisscrossed with lines showing Global Crossing's worldwide routes. But if someone decides to beat that valuation, Winnick might just decide to turn his billions from paper into cash.By Ronald Grover in Beverly Hills, Calif.Return to top